PRC-2 · Chapter 6 · Question 27 of 45
A firm is choosing between Project X and Project Y, which are mutually exclusive. Project X has an NPV of Rs. 50,000 and an IRR of 14%. Project Y has an NPV of Rs. 65,000 and an IRR of 12%. The cost of capital is 10%. Which should be accepted?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Project Y, because its absolute NPV is higher.
Explanation
When mutually exclusive projects have conflicting rankings between NPV and IRR, the NPV decision rule is theoretically superior because it measures the absolute monetary value added to the firm. Project Y adds more value.
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